What is Private Equity and How to Invest in India

What is Private Equity?

A private equity investment refers to the provision of capital in unlisted, privately held enterprises using specialised funds. These funds provide capital to help businesses expand operations, improve efficiency, or enter new markets. Investors want to make a profit in cases where the company is being sold, merged, or listed on the stock exchange. It is highly risky, less liquid and a long-term investment. Unlike mutual funds, which invest in publicly traded securities and provide liquidity, private equity targets unlisted firms and takes a long-term investment perspective.

How to Invest In Private Equity?

If you are considering how to invest in private equity, the following are common avenues of making an investment:

• Fund of Funds: These funds invest in multiple private equity funds. This helps spread risk and gives access to different companies.
• Private Equity-Linked ETFs: India does not offer direct private equity ETFs. Some international or thematic funds may offer limited indirect exposure through listed PE firms.
• Special Purpose Acquisition Companies (SPACs): SPACs raise money to buy private companies and list them on the stock market. In India, SPAC exposure is mostly through overseas markets.

What Returns to Expect from Private Equity Investments?

Private equity can achieve returns higher than traditional investments, though it carries increased risk and requires longer holding periods. Historically, efficiently managed funds have provided annual returns of about 15% to 25% (may vary) depending on market circumstances and strategy. Since these are made in unlisted companies, liquidity is often low. Lock-in periods are long, and exit options are limited, meaning investors may need to stay invested for several years. It is appropriate for individuals who have a long-term perspective and are risk-takers.

Key Takeaways

The concept of private equity is investing in unlisted firms by specialised funds. It is associated with higher risk and low liquidity, with the potential for higher returns. Investments are normally a long-term commitment and require patience. It is most applicable to investors who are able to tolerate market volatility and those who do not require the speed of access to their funds.